As mentioned in this blog on November, 10th, Brazil’s banking system is bracing itself for a wave of consolidation. The last announcement came yesterday as Banco do Brasil, the country’s top state-controlled bank announced it will spend US$2.3 billion to buy a 71.3 percent share in Banco Nossa Caixa SA, owned by the Sao Paulo state government.

Banco do Brasil will have US$217.2 billion in assets with the acquisition of Nossa Caixa, for which it will make 18 monthly payments of US$124.7 million starting in March. Earlier this month, Brazil’s second-largest private sector bank, Itau, bought rival Unibanco, creating a Latin American financial giant with total assets surpassing Banco do Brasil.

Cyrus Sanati has posted some interesting comments on the New York Times blog about this acquisition.

“If you look at the Brazilian banking system, there are 10 large banks representing 87.1 percent of the financial system,” Felipe Asenjo Wilkins, head of research for FIT Research in Santiago, Chile, told DealBook. “This is too much if we compare it with other emerging markets like Chile, Peru and Colombia.”

So who might be next? Banco do Brasil will probably move to purchase a stake in Banco Votorantim, a family-owned bank in São Paulo, Lia da Graça, an analyst with Banif Securities in São Paulo, told Dealbook. That purchase, along with another smaller bank, would put Banco do Brasil in the top spot.

All this could be unsettling to Brazil’s third-largest bank, Bradesco. It is not shy to do a deal to maintain its market share. “From 1948, Bradesco bought like 48 financial institutions” including banks, Mr. Wilkins said.

Still about the banking situation in Brazil, news come out everyday about new joint-ventures including heavy weights on the public sector – ie. Nossa Caixa and Banco do Brasil. The Financial Times gave a note about the consolidation process running at full throttle in the country.

Brazil’s banks are preparing for a wave of consolidation following this week’s merger of Itaú and Unibanco to create the biggest bank in South America. Brazil has about 150 banks, many of them small players concentrating on a single line of business such as car loans or payroll-linked loans, areas that have grown quickly in line with rising employment and wages.

“Smaller banks have been seeing growth of 30 or 40 per cent a year,” says Ceres Lisboa, banking sector analyst in São Paulo at Moody’s, the international credit rating agency. “That’s over. They’ll have to reinvent themselves.”

Dozens of these smaller banks will be snapped up or forced to retreat into niche markets. Banco do Brasil, the federally-owned bank that was Brazil’s biggest before the latest merger, and Bradesco, formerly the biggest private-sector bank, are expected to scurry for acquisitions as they try to regain their dominance.

Consolidation will be helped by recent government measures to inject liquidity into the banking system as the global financial crisis has unfolded. The process should also be orderly as Brazil’s banking system remains solid, thanks to relatively low levels of lending and the fact little credit is sourced overseas.

Brazil is perhaps one of the few countries in the world that hasn’t been talking about recession. The R word is not being mentioned in any of the large newspapers in the country. Moreover, Brazil’s economic team will unveil new credit measures for exporters suffering the consequences of the liquidity crunch. “For now, activity levels haven’t come down,” said Finance Minister Guido Mantega. “I believe there will be a slowdown in consumption and in activity level in Brazil. But we will not have a recession.” The main news agencies in Brazil have also reported that the series of measures the central bank has taken to minimize the impact of the crisis in the South American giant and to ease the liquidity crunch started by investors not willing to take too much risks at the moment. This latest move is aimed at Brazilian exporters.

Fresh news from Reuters reveal that the Brazilian banks are in extremely good shape, thank you very much…

Brazil’s two largest private-sector banks reported strong third-quarter earnings on Monday and said they would continue to take advantage of the current market turmoil to snap up loan portfolios from smaller rivals in distress.

Banco Bradesco (BBDC4.SA: Quote, Profile, Research, Stock Buzz) and Banco Itau (ITAU4.SA: Quote, Profile, Research, Stock Buzz) sought to allay concerns that they might be vulnerable to the recent devaluation of the Brazilian real BRBY against the U.S. dollar by disclosing their exposure to foreign currency derivatives.

Both banks have benefited from surging demand for consumer loans in Brazil’s fast-growing economy at a time when the global credit crunch has pummeled financial firms from the United States to Europe.

Itau (ITU.N: Quote, Profile, Research, Stock Buzz) was not scheduled to report earnings until Nov. 4 but rushed out its results because of the turmoil in financial markets. It posted a quarterly profit of 1.8 billion reais ($775.9 million), up 14.6 percent from a year earlier.

“There are good reasons (…) to believe that Brazil’s economy is resilient to the global financial crisis”. This was the conclusion of Mauricio Cárdenas, Senior Fellow and Director of the Latin America Initiative at Brookings Institution, in an articled published on RGE Monitor. Holding a Ph.D. in economics from the University of California, the analyst has also expressed great optismism for the perspectives of the Brazilian re-industrialization strategy, much due to increasing investment in steel, petrochemicals and defense equipment.

Brazil’s foreign reserves are now $205 billion, four times higher than in 2004. Financial intermediation, though low for developed country standards, is conducted primarily by domestic institutions. Only 30 percent of bank assets are foreign-owned, compared to over 80 percent in Mexico. To the extent that Brazilian banks also have very low foreign liabilities, the economy is somewhat protected from a major credit contraction in international financial markets.

The article is concluded by the assurance that the Brazilian government has learned from mistakes committed in the past.

In fact, the government is launching a re-industrialization strategy, with high investment in steel, petrochemicals, and defense equipment (including construction of its first atomic submarine). Is this going to revive the white elephants of the 1960s and 70s? Probably not. This time around the development strategy in Brazil is carried out by the private sector, with limited support from the government, and much better governance structures than in the past. If these fundamentals can remain strong, Brazil may yet dodge the current global economic bullet.

Eric Farnsworth, Vice President of the Council of the Americas, has produced a special report for the October issue of Poder Magazine called Brazil Rising. In it Farnsworth says that the next US administration should necessarily work with the South American nation on matters such as trade negotiations, energy security and even Iran’s nuclear program.

“Virtually all the economic news coming out of Brazil these days is positive, and Brazil’s global weight has dramatically increased as a result. The largest economy in South America and now the world’s 10th largest, Brazil’s emergence as a middle-income BRIC nation, with powerful growth rates driven by the global commodities boom, have repositioned Brazil as a global actor”, he said. Here is a recent clip he also produced talking about Brazil: